Tuesday, June 24, 2008

Bunge (NYSE:BG): Bounce candidate?

- Deutsche Bank is out positive on Bunge (NYSE:BG) following the acquisition of Corn Products noting the steep drop in Bunge's stock yesterday, despite a 31% increase in guidance, was an obvious sign that investors generally do not favor the deal.

Firm reiterates their Buy rating and $143 tgt on the shares saying they believe the acquired business will benefit from Bunge's origination, risk management and logistics capabilities, particularly in the current era of high and volatile commodity prices. Bunge will be able to leverage its fixed cost logistics network by running more products through the system. Firm estimates the acquired business will contribute approximately 13% to the combined company's EBIT in 2009E.

Deutsche also believes the Corn Products' South American business (about 30% of Corn Products' profits) is a strong fit for Bunge. This division holds about 70% market share in South America selling a variety of sweeteners, starches, animal feed and corn oil. Corn Products' business in South America is done on a pass through basis, as opposed to the annual contracting done in the U.S. and Canada.

While the rationale for Bunge acquiring Corn Products may be unclear to the market at this time, the firm believes the product line diversification has strategic value, similar to the investments the co has made in the past.

Deutsche is raising their 2008E EPS estimate from $7.51 to $9.56 on higher fertilizer gross profit/ton and higher assumed oilseed processing margins. For 2009E, they raise their core Bunge estimate to $10.65 on continued strength in fertilizer.

Notablecalls: I suspect a lot of shorts were pressing their bets on Bunge yesterday with the market giving little credit to co's upward guidance. To me, buying CPO seems like a fairly smart bet, especially as BG is using its own stock as the currency. The global shortage of food is not going away any time soon and large agri players like Bunge will benefit for many years to come.